Corporate Governance

Director Duties and the Delaware Standards: The View from Wachtell Lipton

By J. Robert Brown

We received a memorandum drafted by Wachtell Lipton titled "Risk Management and the Board of Directors."  In the memorandum, the firm describes the oversight responsibilities of directors under Delaware law.  The memorandum has this to say about director oversight obligations:  "The cases that followed [Caremark] made clear that there would be no liability under a Caremark theory unless the directors intentionally failed entirely to implement any reporting or information system or controls or, having implemented such a system, intentionally refused to monitor the system or act on any warnings it provided."  

In other words, so long as a system in place (with the Delaware courts essentially putting in place no standards designed to ensure that the system is thorough and meaningful), boards have few if any affirmative duties with respect to corporate oversight.  In other words, they merely must react to what is given to them.  They have no affirmative obligations to ask for information or require additional reports.  Moreover, much of the information flow is controlled by the chairman of the board (who traditionally sets the agenda for board meetings).  In the United States, the CEO and Chairman are typically one and the same, giving management a substantial amount of control over the information flow to the board.

Perhaps its time for a system of monitoring that has affirmative obligations attached.

Full post as published by The Race to the Bottom on November 28, 2008 (boomark / email).